In terms of GBP/USD we have the Bank of England this week and speculators are heavily long coming into the meeting and we expect a sell off.

The market is looking for UK rates to move higher and we have the Bank Of England meeting on Thursday – we expect a dovish Bank of England and with speculators heavily long we think there could be a big break to the downside in GBP/USD.

Inflation and Interest Rates

Falling UK inflation removes pressure from the Bank of England to repeat the 50 basis point rate hike it did back in June. Services inflation, a key metric for the Bank, fell back in June, against BoE expectations for it to remain unchanged.

In addition to the above the UK saw an easing of inflation in other areas, including food. This easing of inflation was tempered by a recent upside surprise to pay growth, but this was offset by further signs of a cooling in the jobs market with the return of more workers this was acknowledged in a recent press conference by Governor Andrew Bailey.

A Rate Rise of 25 bps and a Cautious BoE

There should be enough in the latest data for the Bank to do just a 25bp hike this month. While there is a counterargument that the latest inflation number is just one data point, you could have made a similar argument about the previous month’s data, which the Bank said was “significant news”.

The market is still looking for a terminal rate above 6% but we don't see that unfolding. We expect a 25 bps hike and a cautious Bank of England who are likely to be more dovish than the market expects with the biggest long position since 2014 long GBP/USD we see limited upside and a lot of downsides from current levels.

The Bank of England will be keen to help the UK economy which remains weak – businesses are struggling and households face a cost of living crisis and the BoE will want to give relief to businesses and hard pressed consumers. The UK economy dodged recession this quarter but has the worst growth in Europe outside of Germany and interest rate hikes look set to send the economy into recession.

Sentiment a Bullish Extreme

The COT Net Traders Positions show the biggest net long position held by speculators since 2014 while smart money commercials are heavily short which points to more downside in the GBP.

Technical Analysis

Our view of the major support and resistance levels to look out for on the chart below.